Commonwealth Bank Profit Climbs on Impairments Drop, Housing

The Commonwealth Bank of Australia (CBA) logo is displayed outside one of the bank's branches next to the Queen Victoria Building, left, in Sydney. Photographer: Brendon Thorne/Bloomberg

Feb. 12 (Bloomberg) -- Commonwealth Bank of Australia, the
nation’s biggest lender, reported a 14 percent increase in
first-half profit to a record on lower bad-debt charges and
growth in home lending.

Cash profit, which excludes one-time items, rose to A$4.27
billion ($3.85 billion) in the six months ended Dec. 31 from
A$3.75 billion a year earlier, the Sydney-based lender said in a
statement. That beat the A$4.17 billion median estimate of nine
analysts surveyed by Bloomberg. The bank set aside A$457 million
for bad debts, 26 percent less than a year earlier.

CBA, which writes one in every four mortgages in the
country, is gaining from a revival in home loans and a drop in
funding costs. Outstanding mortgages in Australia climbed 5.4
percent in the year to December, the fastest pace in two years,
data from the Reserve Bank of Australia show.

“The housing market is strong and CBA is a relative
outperformer, giving it revenue and earnings momentum,” Mark
Nathan, managing partner at Sydney-based Arnhem Investment
Management, which controls about $3.8 billion, said by phone.

“The benign bad-debts environment means well for the entire
banking sector,” Nathan said. “Having said that, a lot of the
good news is factored into CBA’s shares and the banking sector
is overvalued. We are slightly underweight the Australian
banks.”

Shares Higher

Shares of CBA, which touched a record A$79.88 on Nov. 8,
rose 0.4 percent to A$76.20 at the close of trading in Sydney.
They advanced 25 percent last year, outpacing a 15 percent
increase in the benchmark S&P/ASX 200 index.

Australia’s largest banks are trading at the most expensive
levels since before the global financial crisis. The lenders
trade at an average of 2.1 times the net value of their assets,
the highest since 2007 and a 79 percent premium over the MSCI
World Bank Index, data compiled by Bloomberg show.

The bank’s statutory net profit for the first half climbed
16 percent to A$4.21 billion, it said today. It will pay an
interim dividend of A$1.83, up 12 percent from a year earlier
and higher than a A$1.80 median estimate of analysts surveyed.

“The signs are that profitability in the Australian major
bank sector will be strong by international standards during
calendar 2014,” Standard & Poor’s credit analyst Gavin Gunning
said in a report today.

Home Loans

Home loans grew 7 percent in Australia to give the bank a
market share of 25.3 percent, while loans to businesses expanded
only 3 percent from a year earlier, the bank said.

“There is little real evidence of a meaningful increase in
investment in the rest of the non-resource sector of the
Australian economy, other than in housing,” Chief Executive
Officer Ian Narev said in today’s statement.

Bad-debt charges as a percentage of average gross loans
dropped 6 basis points to 16 basis points, the lowest since the
six months ended June 2007, filings by the bank show.

Net interest margin, a measure of lending profitability,
contracted 3 basis points from the previous half to 2.14 percent
due to continued funding and liquidity pressure, today’s report
showed. Competition for deposits remained strong, eroding
margins, the bank said.

Deposits grew A$40 billion and made up 63 percent of CBA’s
total funding as of Dec. 31, the same proportion as six months
earlier, the bank said. Australian banks are increasing deposits
to ensure compliance with global liquidity rules that begin in
2015. The bank raised A$17 billion through bonds, it said.

Capital Ratio

Core Tier 1 capital, a measure of the bank’s ability to
absorb losses, increased to 8.5 percent at the end of December
from 7.8 percent on Sept. 30, under the Australian Prudential
Regulation Authority’s measures.

Australia & New Zealand Banking Group Ltd. reported
yesterday first-quarter cash profit climbed 13 percent from a
year earlier on lower bad-debt charges. National Australia Bank
Ltd. releases its quarterly results on Feb. 21. Westpac Banking
Corp. doesn’t update investors on its quarterly performance. At
CBA, the fiscal year ends in June, compared with September for
its main competitors.